Written by Convera’s Market Insights team
Dollar softer as risk assets rise
George Vessey – Lead FX Strategist
Volatility across financial markets remains low and amidst a quiet week on the data docket, the US dollar index has surrendered almost 40% of its post-jobs report and services PMI gains since Monday. Lower-yielding currencies like the Japanese yen are expected to remain under pressure in such low volatility periods.
With markets as stable as they are right now, equities continue to climb as risk sentiment improves. The US benchmark S&P 500 hit a fresh record high yesterday helped by the hopes of a ceasefire in Gaza and upbeat corporate earnings, shrugging off concerns about delayed interest rate cuts and banking jitters. Federal Reserve (Fed) policymakers continue to push back against market pricing of 120 basis points of rate cuts this year, warning it would be a mistake to move rates down too soon or too quickly without sufficient evidence that inflation is on a sustainable path towards the 2% target. Expectations of early easing from the Fed will continue to ebb and flow though after Friday’s release of the annual US CPI revisions and the flash inflation report next week. US jobless claims and the 30-year Treasury auction are the highlights today.
With the US labour market still strong, geopolitical tensions elevated and more supply chain frictions emerging, such as record low water levels in the Panama Canal slowing cargo traffic, a cautious Fed is justified. This is also supportive for a slightly stronger USD in the short term.
Waiting game for sterling
George Vessey – Lead FX Strategist
The British pound remains on a firmer footing, helped by data showing British house prices rose 2.5% in the year to January, the strongest annual growth rate for a year. This gives tentative signs of recovering momentum in the housing market and underpins hawkish Bank of England (BoE) rhetoric of late.
The BoE’s Deputy Governor Sarah Breeden suggested interest rate cuts aren’t on her mind and instead is considering how long they should stay at current levels as opposed to hiking. This view is shared by many BoE policymakers, although the most dovish have also been on the wires this week warning of a looming economic downturn with rates so restrictive at 16-year highs. The vote split at the BoE’s meeting last week was significant, with two members advocating for a hike while one favoured a cut. We agree with current market pricing that cuts will come from summer onwards, after the Fed pivots, and believe GBP/USD can climb closer to $1.30 by year-end based on yield differentials moving in favour of the pound. However, persistent UK stagflationary risks remain a headwind.
In the short-term, seasonality and positioning don’t look constructive for sterling though and a move back towards $1.25 can’t be ruled out despite the encouraging rebound against the dollar and other currency peers this week.
Euro remains steady, awaits new catalyst
Ruta Prieskienyte – FX Strategist
After a frantic period of macro news, calm has settled over the markets as investors await a fresh stimulant to inject volatility. Europe’s STOXX 50 continued to trade near 23-year highs and German 10-year bond yield stabilized around 2.32%. EUR/USD was left little changed on the day around $1.0760, and is inching closer to $1.08 this morning.
The only data release from the common bloc worth noting was the 4th consecutive monthly contraction in German industrial output in December 2023. Markets largely shrugged off the data release, as the lagging indicator fit into the same story we have seen thus far, namely that the bloc’s largest economy landed itself into a recession setting in 2023. Elsewhere, the National Bank of Poland (NBP) kept its benchmark rate unchanged for the fifth month at 5.75% and preserved its wait-and-see stance amid present inflation risks. The latest CPI print from December showed inflation in Poland cooled to 6.2% y/y but stayed well above the 1.5-3.5% target range. While the NBP anticipates inflation to ease sharply in Q1 2024, further developments remain uncertain due to the impact of fiscal and regulatory policy and the pace of Poland’s economic recovery. Markets do not expect the NBP to cut earlier than Q3 2024.
The calendar today is looking quiet yet again with no major data releases from either side of the pond. Several ECB speakers are scheduled speak throughout the day but are unlikely to alter the current ECB rhetoric. On the US front, jobless claims report might be interesting to an extent, thanks to Powell supercharging the importance of US labour market reports during the latest FOMC meeting. The data print could inject fresh volatility if it deviates substantially from the consensus. EUR/USD is facing a 100-day SMA at $1.0784, with no strong catalyst to break through the barrier. For now, we are in a new EUR/USD holding pattern at slowly lower levels and that looks likely to be the case into Friday’s release of the US CPI revisions.
CAD struggling to break past key resistance level
Ruta Prieskienyte – FX Strategist
The Canadian dollar continues to trade in a tight range on Thursday as markets digest latest comments from Fed officials in the previous session. The stream of Fed officials speaking this week showed policymakers still very much in ‘wait and see’ mode and in no particular rush to ease just yet. The yield on the Canadian 10-year government bond jumped past 3.49%, approaching the two-month high of 3.52% from January 26th continues to closely track the surge US Treasury yields.
On domestic front, investors assessed the minutes from the Bank of Canada’s (BoC) last policy meeting and comments from Governor Tiff Macklem from earlier this week, who noted that current monetary policy needs more time to bring inflation sustainably down to the target. BoC remains ‘particularly concerned about persistent inflation and lowering rates ‘prematurely’ and continues to see risk of inflation being more persistent than expected. The Canadian dollar recouped some of the recent, appreciating close to 0.6% WTD by Thursday’s close, but has the subsequent comments from Fed officials threatens the progress.
The calendar today is looking quiet with no major data releases. US jobless claims report might be interesting to an extent, thanks to Powell supercharging the importance of US labour market reports during the latest FOMC meeting. The data print could inject fresh volatility if it deviates substantially from the consensus. For now, the Canadian dollar is testing a resistance level around $1.360 level against the US dollar, but without a strong catalyst is unlikely break below. Oil prices are providing support for the Loonie, with WTI crude futures rising for the fourth straight session above $74/barrel as renewed tensions in the Middle East further stoked supply disruption fears. However, the rise is not a substantial enough factor to help CAD break past the 200-day SMA barrier.
CAD broadly stronger on hawkish BoC comments
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: February 05-09
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
